U.S. v. One Urban Lot Located at 1 Street A-1, Valparaiso, Bayamon, Puerto Rico, A-1

• Decision Date: 12 September 1988
• Docket Number: PUERTO,Nos. 88-1071,BAYAMO,A-1,88-1193 and 88-1194,VALPARAIS,s. 88-1071
• Citation: 865 F.2d 427
• Parties: UNITED STATES of America, Plaintiff, Appellee, v. ONE URBAN LOT LOCATED AT 1 STREETRICO, etc., et al., Defendants, Appellees. R.G. Mortgage Corp., Claimant, Appellant. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 427

865 F.2d 427

13 Fed.R.Serv.3d 311

UNITED STATES of America, Plaintiff, Appellee, v. ONE URBAN LOT LOCATED AT 1 STREET A-1, VALPARAISO, BAYAMON, PUERTO RICO, etc., et al., Defendants, Appellees.

R.G. Mortgage Corp., Claimant, Appellant.

Nos. 88-1071, 88-1193 and 88-1194.

United States Court of Appeals, First Circuit.

Heard Sept. 12, 1988.

Decided Jan. 10, 1989.

Antonio M. Bird, Jr., with whom Bird & Bird, San Juan, was on brief, for claimant, appellant.

Miguel A. Fernandez, Asst. U.S. Atty., with whom Daniel F. Lopez-Romo, U.S. Atty., Hato Rey, P.R., was on brief, for plaintiff, appellee.

Before CAMPBELL, Chief Judge, TORRUELLA, Circuit Judge, and ATKINS, ^* Senior District Judge.

TORRUELLA, Circuit Judge.

In 1981 Angel and Elena Cartagena (the "Cartagenas") purchased a residence in the Valparaiso development in Bayamon, Puerto Rico, assisted by a $67,000, 30 year loan from claimant-appellant R.G. Mortgage Corp. ("R.G."). The residence was encumbered by a mortgage. It was recorded as a first mortgage on the property in the Registry of the Property of Puerto Rico, Second Section of Bayamon. The mortgage was secured by a guarantee issued by the Veterans Administration. The deed of mortgage did not require that R.G. approve a subsequent sale of the property. ¹

On February 14, 1986, the Cartagenas sold the property to Jose Valentin Lopez Nieves ("Lopez") and his wife. No transfer of the lien, or any such procedure, was expedited. The only change, from R.G.'s perspective, was a change of the record owner.

Shortly after Lopez purchased the property he was indicted for drug-related criminal activity and on August 19, 1986, the United States filed a complaint of forfeiture in rem against several vehicles and real estate properties belonging to Lopez, including the Valparaiso residence. It is undisputed that Lopez bought the residence with proceeds traceable to an exchange for a controlled substance and that it was used or intended to be used to commit or facilitate the commission of a violation under Chapter 13(I) of 21 U.S.C.

On October 2, 1986, a U.S. Marshal served upon R.G. through its vice-president, Juan Jose Diaz, a copy of an amended complaint and warrant of arrest in rem concerning the Valparaiso property. The warrant of arrest stated that the "owners" or "possessors" of the property had 10 days to file a written claim and 20 days thereafter to file a responsive pleading. The amended complaint listed pursuant to 21 U.S.C. Sec. 881(a)(6) the items of property to be forfeited. Diaz, based on his experience of eleven years in the mortgage industry, and on his understanding that R.G. was a mortgage creditor, not an owner, a possessor or a named party, deemed the complaint to be only against Lopez' interest in the property and did not refer the papers to counsel. In a sworn statement Diaz further explained that from his experience, he understood that, except for a property tax lien (created by statute), mortgage liens remain unaffected by proceedings to enforce liens subsequently recorded in the Registry of Property. Diaz' understandings, based on current practices of the mortgage industry, were not disputed by the government.

Meanwhile, during the months of October and November, the government moved for the issuance of, and eventually published a warrant for seizure and monition in a newspaper of general circulation. The warrant stated that interested persons had to file their claims by December 10, 1986. Since the criminal proceedings against Lopez were in progress, the government moved for a stay of the forfeiture proceedings pursuant to 21 U.S.C. Sec. 881(i), ² which motion was granted by the court on December 2, 1986. ³

We backtrack a bit to retrace this trail from R.G.'s perspective. By August, 1986, Lopez had stopped making mortgage payments to R.G., upon which the latter began collection efforts, first through R.G. employees or agents, and eventually by referral to counsel. Counsel discovered the status of the forfeiture proceedings and explained it to R.G. officials. By then, the newspaper notice with the December 10 deadline had been issued, as well as the stay, effective December 2. R.G. understood the stay to proscribe any papers related to the civil forfeiture. Here the stories meet: on March 6, 1987, R.G. filed a motion for leave to make late filing of the claim and answer, and other papers, including a claim and an answer to the amended complaint.

On March 20, 1987, the government filed a motion requesting, inter alia, that the court refrain from considering R.G.'s motion while the stay was in effect. The motion was granted on May 11, 1987. On July 14, 1987, the government requested that the stay be lifted for the exclusive purpose of establishing the validity of R.G.'s and others' claims. On July 22, 1987, the government moved to strike R.G.'s claim and answer and requested issuance of a partial decree of forfeiture covering the Valparaiso property. The court struck R.G.'s claim and answer and, on August 28, 1987, it issued a partial decree of forfeiture.

Several motions ensued, which reflected at some times confusion on the part of R.G. as to what rights were actually determined. The district court, to clarify the confusion and to facilitate the parties' procedural stance, issued an order on December 18, 1987, ordering that a "decree of default and forfeiture entered on August 28, 1987, be amended to provide that it constitutes a final judgment granting the forfeiture requested by the United States as to the Valparaiso property." The court also certified, pursuant to Fed.R.Civ.P. 54(b), that the order constituted a final judgment granting the forfeiture requested by the United States over the Valparaiso property. It is the August 28, 1987 order, as clarified and amended on December 18, 1987, that is before us on appeal.

Discussion

The standard applicable to set aside an order of default is "good cause." Fed.R.Civ.P. 55(c). This is the standard applicable to this case since when R.G. appeared final judgment had not been entered. Fed.R.Civ.P. 54(b). We have stated repeatedly that motions to set aside default judgments are left to the sound discretion of the district court and that appellate courts will not reverse the district court's decision unless clearly wrong. Taylor v. Boston and Taunton Transp. Co., 720 F.2d 731, 732 (1st Cir.1983). The relevant factors to be considered in determining whether there is "good cause" are whether the default was willful, whether setting aside the default will prejudice the other party and whether there is a meritorious defense. See 6 Moore's Federal Practice, p 55.10 (1988); U.S. v. One Parcel of Real Property, 763 F.2d 181 (5th Cir.1985). We shall consider them in that order.

First, we address whether R.G.'s default was willful. At first glance, it appears so. Upon being served by papers that announced the imminent forfeiture of a property on which it had an interest, R.G. put the papers away. Such seemingly lackadaisical conduct, however, gains some respect when viewed in the context of Puerto Rico mortgage law and practice. R.G. argues, supported by Puerto Rico law, 30 L.P.R.A. Sec. 2001 et seq. (1987) (an argument undisputed by the government), that properly recorded rights, having the procedural safeguards of a strict Registry system, are presumed as extant in the Registry. 30 L.P.R.A. Sec. 2354. Lienholders of properly recorded property interests will thus have priority over all others. Id. Secs. 2354-59. This presumption is the basis for the "fe registral," the public faith in the Registry of Property, which allows reliance by all parties engaging in real property transactions. Thus Mr. Diaz' statement gains credence:

Through my eleven years of experience in the mortgage industry in Puerto Rico it has been my understanding that except for a property tax lien created by statute, a mortgage lien remains unaffected by any...